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Thursday, February 4, 2016

After the sell off, stocks may actually be cheap

Sell Off Wall Street - A Silver Lining

Wall Street is finally breathing a sigh of relief after the S&P 500 Index managed to hold on to its first weekly gain of the year. One prominent market watchers had commented that inspite of signs of strength; stocks are still in store for a thundering reset. The ruthless sell off Wall Street had faced during the last few weeks could have a silver lining.

According to FactSet, the S&P 500 Index is presently trading at around 15 times the earnings; analysts tend to expect constituents companies to post over the next year. This reading is known as `forward P/E on the popular measure of valuation which is compared to a 15 year average forward P/E ratio of 15.7. The conclusion collected from historical comparison is based on the timeframe taken into account.

It is worth observing, in this case that the current valuation level tends to represent the premium to the average of 14.3 observed over the past five and ten years periods. Since the firm in the meantime is probably using various earnings estimates, IQ of S&P Capital current forward valuation number is 15.7 though they also observed that was under the 15 year average.

Broad Market Trading in Abyss

David Stockman who was the former OMB Director under President Ronal Reagan, is of the opinion that the broad market has been trading in the abyss after breaking beyond 1,870 in 2014, since then with a meagre one percent return. He had commented that they had been there for 700 days and had something like 35 attempts at rallies where all have failed for the `four no’s’. For him the four no’s comprise of a combination of no escape velocity, no earnings growth, no dry powder from the central bank and no reflation.Accompanied together, it leads him to the belief that the U.S. economy seems to be on the point of a full blown recession.

He further adds that they are getting to a point where the chickens are coming home to roost and there is no help from the central banks and that is why these rallies seem to get weaker as well as shorter. He is of the belief that the overflow of easy money from central banks all across the world has shaped a credit crisis which is so severe that it could probable take years to come out of what it has created.

High Powered Money – Enormous Expansion of Credit

Market watchers have pointed out a stunning $21 trillion collective balance sheet built up all around the globe, up from 2.1 trillion only 20 years back. He has said that this is high powered money which has resulted in an enormous expansion of credit as well as financial valuation bubble.

Stockman has observed that the speedy increase of credit has caused debt all over the world of over $225 trillion and has mentioned that they `are at peak debt’. Stockman, at this point considers that the hands of the Fed could be tied up after being on zero interest rates for almost a decade. There is nowhere to go but negative and it is time to get out of the market completely.

The S&P 500 has been progressively in correction territory in 2016and the large-cap index closed the week at around 11% from its 52 week high. However Stockman is of the opinion that it could plunge another 30% from its present trading which takes it back to levels not envisaged since 2012.